Iceland’s Property Boom Grows Over 40% in Last Quarter

Iceland is beginning to experience a property boom but it appears it is caused by capital controls brought since the 2008 crisis. Foreign Investors are buying up property since they are unable to withdraw their money from the country.

Iceland’s crisis-management policies are creating the island’s next property bubble less than four years after its banking meltdown threw the economy into its worst recession.

Prices for new homes touched a record last quarter, having surged 40.1 percent since the final three months of 2010, according to estimates by the National Registry of Iceland in Reykjavik. Average house prices have risen 11.3 percent since the market bottomed at the end of 2009, according to central bank data at the end of the first quarter.

Currency controls imposed in 2008 and designed to protect the island of 320,000 from a mass capital exodus are now channeling funds into a market that is showing symptoms of overheating and driving home-loan debt higher. Close to $8 billion in kronur are held by offshore investors unable to get their money out of the country, according to Arion Bank hf economist Thorbjorn Sveinsson. As the government signals restrictions will remain until at least 2015, funds are flowing into one of the few longer-term investment options: real estate.

“If the development continues without interference, this will lead to a property bubble within the next two years,” Asgeir Jonsson, an economist at Reykjavik-based asset manager Gamma, said in an interview. “There’s a greater risk of an asset bubble being created in an economy that is closed off behind capital controls.”